Emerging Markets: What has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)

1) Poland’s lower house unexpectedly voted on a new legislation that would increase the burden of FX-linked mortgages losses to banks.
2) The popularity of the Chilean and Brazilian presidents continue to tumble. 
3) After Mexico and Russia, it was the turn of the Brazilian central bank (BCB) to take action against currency depreciation. 
4) Malaysia’s anti-corruption agency claimed that PM Razak’s did nothing wrong – at face value, at least. 
5) A key figure from Brazil’s ruling party PT has been arrested (again).
6) Saudi Arabia announced plans to raise about SAR100 bln (~$27 bln) through bond issuance.

In the EM equity space, China (+2.4), Russia (+1.4%), and UAE (+0.7%) have outperformed over the last week, while Peru (-2.7%), Taiwan (-2.6%), and Brazil (-2.5%) have underperformed.  To put this in better context, MSCI EM fell -1.9% over the past week while MSCI DM fell -1.1%.
In the EM local currency bond space, Indonesia (10-year yield -12 bp), South Africa (-6 bp), and Hong Kong (-6 bp) have outperformed over the last week, while Brazil (10-year yield +84 bp), Ukraine (+83 bp), and Russia (+26 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 3 bp over the past week.

In the EM FX space, INR (+0.5% vs. USD), KRW (+0.2% vs. USD), and CZK (+0.2% vs. EUR) have outperformed over the last week, while RUB (-4.5% vs. USD), BRL (-2.8% vs. USD), and MYR (-2.4% vs. USD) have underperformed.

1) Poland’s lower house unexpectedly voted on a new legislation that would increase the burden of FX-linked mortgages losses to banks. The measure will have banks’ share increase from 50% of losses to 90%.  A vote is expected in the upper house on September 2-3, then needs to be signed into law by the president.  There are press reports that President Duda and his party could introduce their own version that could be even more negative for banks.  As we feared, Duda ran (and won) on a very populist platform, and that has dragged Civic Platform into taking more populist stances too in an effort to boost its popularity ahead of October elections. 

2) The popularity of the Chilean and Brazilian presidents continue to tumble.  The latest polls show President Bachelet’s approval rating has fallen to 26% from 27%, while her disapproval rate rose to 70%.  Her Brazilian counterpart Rousseff has seen her approval rating fall to just 8% and her disapproval rating reach the highest on record for any president, at 71%.  Note that the latter figure is higher than that for former president Collor during the time of his impeachment.  Despite the similar trend, the impact in governability in the two countries is incomparable.   The Chilean government is no way at risk and it is still likely to continue to legislate despite the challenges.  The ruling PT party in Brazil, on the other hand, is going through a full blown existential crisis.

3) After Mexico and Russia, it was the turn of the Brazilian central bank (BCB) to take action against currency depreciation.  The BCB decided to increase the rollover rate of its FX intervention program (via swaps) from 60% to 100%.  These swaps function as sales of dollars in the future market, and the adjustment of the rollover rate should be interpreted as a proxy of the BCB’s attitude towards FX moves.  We believe that the trigger for the change was as much about levels as about the pace.  The move by the BCB is unlikely to cause a sustained reversal of the trend, but it should help, especially after the more hawkish minutes earlier this week.

4) Malaysia’s anti-corruption agency claimed that PM Razak’s did nothing wrong – at face value, at least.  The agency’s report said that the money that ended up in his bank accounts were not from the development bank 1MDB, but from “donations.” The problem is that even if PM Razak has done nothing illegal, the way he handled the situation has not helped, to say the least, after the arrested protesters and lashed out against foreign influence in the country.  This story is far from over.  The opposition and the disgruntled public will want to know where these sizable donations came from, keeping the pressure on Razak.

5) A key figure from Brazil’s ruling party PT has been arrested (again). Jose Dirceu, chief-of-staff under former President Lula, was singled out by prosecutors as being a major operator in the Petrobras corruption scandal.  They also linked the current scandal to a former one, the Mensalao, which supposedly took place while he was in government.  The risk here, of course, is the surfacing of a smoking gun that would link these developments to Lula, arguably the most powerful politician in the country and possible candidate for the next presidential race.

6) Saudi Arabia announced plans to raise about SAR100 bln (~$27 bln) through bond issuance. The plan is to sell debt in tranches of 5-, 7-, and 10-years.  The governor of the Saudi Arabian Monetary Agency (SAMA) indicated that the kingdom issued about SAR15 bln in local bonds last month.  It was the first sovereign issue since 2007.  Debt issuance might carry into next year.  The drop in oil prices has seen Saudi Arabia draw down its reserves by about $65 bln in the past year.  Some of this likely reflects valuation adjustments.  The planned borrowing suggests that Saudi officials want to maintain their domestic spending plans, while minimizing the drawdown of its reserves.   

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